Analysis: Government relief deeds for decommissioning

Aberdeen University professor John Paterson
Aberdeen University professor John Paterson

The Decommissioning Relief Deed dates back to a statement by the then Chancellor of the Exchequer, George Osborne, in September 2013.

READ: Treasury paying £400m decom relief to Japanese giant Mitsubishi

It emerged from industry concern that its ability to plan for the late life of an offshore asset could be compromised by a future Parliament altering the value of decommissioning allowances or perhaps removing them altogether.

 

In order to understand their significance, certain facts need to be borne in mind.

 

Oil companies do not as a rule explore for hydrocarbons and develop discoveries offshore individually, but rather in the context of joint ventures – thus spreading the risk.

 

On the UK Continental Shelf, the relevant legislation imposes the obligation to prepare and implement a decommissioning plan jointly and severally on any company holding a specific notice. Such notices are served fairly liberally on any company with an equity interest in an asset. Even if a company divests itself of its stake in the asset and has its notice withdrawn, the law allows the government to call that company back without limit of time to fulfil its decommissioning obligations. The government has indicated that it would only use that call-back power as a last resort.

 

The problem of other co-venturers not being able to fulfil their obligations remained. This problem was dealt with by means of Decommissioning Security Agreements, designed to ensure that there would always be funds available to carry out decommissioning work. Such agreements also served to provide reassurance to companies and to the government that asset transfers could go ahead.

 

The risk that decommissioning allowances could decrease in value (or be removed entirely) led to essentially inefficient Decommissioning Security Agreements, as calculations of the values involved were prudently made on the assumption of the worst case scenario (that is, that there would be no allowances).

 

This meant that money that could have been used for exploration or development activities was tied up uselessly. It also had a chilling effect on the transfer of assets, potentially restricting the ability of late-stage specialists to take over assets from exiting major companies and deriving value consistent with the UK’s desire to maximise economic recovery of hydrocarbons (a policy which predates the Wood Review and the current MER UK Strategy).

 

Equally, the industry worried about what would happen to such allowances in the event that a co-venturer was unable to meet its obligations; would a disproportionate burden thus fall on the remaining parties?

 

Given these concerns, which not only impacted the industry but also the UK as a producer of hydrocarbons, the Treasury agreed to enter into binding contracts that would operate as follows.

 

In the event that the value of decommissioning allowances changed for the worse after the agreement entered into force, the Treasury would make a compensating payment to the company concerned.

 

Furthermore, in the event that a co-venturer was unable to meets its decommissioning obligations, a party to such a contract would be able to access that co-venturer’s decommissioning allowances.

 

In short, the whole arrangement is certainly to the advantage of the industry, but it is also designed with the overall interests of the UK in mind.

 

The extent to which the UK taxpayer will make a substantial contribution to the costs of decommissioning has been evident for a long time, but it is only in the past year or two that it has come more to the attention of the public.

 

The sums are large, but need to be set in the context of the very substantial tax bills the industry has paid over the lifetime of the basin (measured in hundreds of billions of pounds), to say nothing of the employment that it has brought, directly and indirectly, and thus the further personal and corporate income tax payments that have been generated.

 

The UK would be a very different country today without that income that on occasion arrived at some fairly critical junctures.

 

It’s also worth considering why the money needs to be spent. Very roughly speaking, half the costs of decommissioning relate to the plugging and abandonment of wells. The other half relates to the removal of infrastructure and then its reuse, recycling or disposal.

 

It’s worth asking whether we might actually want to consider leaving more of the infrastructure in place to the extent that it is now part of the ecosystem. That is not possible at present under relevant international law (specifically OSPAR Decision 98/3), which requires removal except in certain narrowly defined cases. OSPAR essentially interprets environmental protection as clean sea beds, but others argue that it could include leaving infrastructure in place where a case can be made that it is part of the ecosystem and removal would be damaging.

 

On the other hand, to the extent that decommissioning does go ahead as currently envisaged by OSPAR and to the extent that more rather than less of it is carried out by UK companies, the decommissioning allowances and any payments under Decommissioning Relief Deeds are essentially recycled into the economy.

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